Outsourcing Issues and Challenges Facing CEOs and CIOs: JITCAR JITCA

Outsourcing means getting a service performed outside of the focal firm utilizing the global ICT infrastructure for back and forth communication and delivery of service. The two primary types of outsourcing are: IT Outsourcing or ITO and Business Process outsourcing or BPO. Outsourcing results in exporting of white collar jobs. When blue collar work went to countries like China and Japan and South Korea in the 1980sit was called exporting of blue collar jobs and not outsourcing. Outsourcing in its myriad forms and shapes is here to stay. Companies, large, medium size and small, cannot survive without some outsourcing. ITO includes outsourcing of systems development (designing, coding, testing etc.) and systems maintenance. BPO includes diverse business as well as non-business functions like accounting, call centers, film cartoons and animation, financial analysis, human resources management, legal work, radiology analysis, taxes filing, tutoring etc. In terms of location of outsourcing, it can be on shore, near shore, off shore, or far shore.

Special issues of leading journals are being devoted to the phenomenon of outsourcing: JITCA/JITCAR has had 4 issued on this topic, and an upcoming issue of MISQ will be devoted to offshoring. Several conferences and shows focus on bringing together diverse stakeholders of outsourcing under one roof for knowledge sharing and networking: annual international outsourcing conferences organized by the center for global outsourcing, world outsourcing summits organized annually by Corbett Associates, HRO shows organized annually, periodic conferences organized by Outsourceworld in USA and Europe and others based in Europe, Russia, India etc. To summarize, in the words of Dr. Joseph O. Okpaku, "outsourcing, which epitomizes the quintessence of true globalization, with services being provided where they can most efficiently and economically be produced and delivered where they are most needed and valued, is a reality that is fast becoming the permanent feature of the global economic context."

PREDICTIONS ABOUT GLOBAL OUTSOURCING

The following predictions speak volumes about the size and scope of global outsourcing:

1. IDC estimates the global BPO market will grow to $1.2 trillion in 2006, up from $300 billion in 2004, with both U.S. and European companies planning to outsource businesses, accounting for nearly 23% of their revenues versus 5% today.

2. According to Gartner Inc. and IDC, the market for offshore IT services will more than double from about 3% of overall IT services spending in 2005 to between 6% and 7% of overall spending within the next three years. Gartner expects offshore IT services spending to reach $50 billion by 2007. IDC analysis anticipates that the worldwide IT outsourcing market will grow to $18 billion by 2008, at an annual compound growth rate of 20%.

3. By 2008, nearly one-quarter of U.S. spending on application development, integration and management services will go to offshore providers, according to IDC.

4. In its Global Economics report, Goldman Sachs has created a scenario where over the next 50 years, Brazil, Russia, India and China could become much larger forces in the world economy. In fact, in less than 40 years, some emerging economies could become larger than the G6 in U.S. dollar terms. The report goes on to state that by 2025, they could be more than half the size of the G6. Of the current G6, only the U.S. and Japan may be among the six largest economies in U.S. dollar terms in 2050.

5. By 2008, the Global Insight report concludes, IT offshoring will account for roughly $125 billion in additional U.S. gross domestic product annually, a $9 billion jump in real U.S. exports, and, most important, net 317,000 new jobs in the United States. By 2015, the amount will be increased to $250 billion.

6. More than 80% of the major global multinational corporations will have an offshore presence by the end of 2005.

7. The Foresight Exchange published the claim in Future of IT Jobs that if futures markets trade above $0.50, then there will be more IT jobs in America in 2012 than there were in 2000.

8. After surveying IT services vendors, IDC reported that the offshore component in delivery of U.S. IT services might rise as much as 23% by 2007, up dramatically from 5% in 2003.

CRITICAL OUTSOURCING ISSUES FACING CEOs AND CIOs

Given the predictions for phenomenal increases in outsourcing and offshoring on the world landscape, it is imperative that the MNCs as well as SMEs start paying attention to the critical outsourcing issues facing CEOs and CIOs.

A structured Delphi iteration approach was used during July-August, 2005 to generate a list of rank ordered outsourcing issues facing CEOs and CIOs of client companies. Companies represented in this study are: BAE Systems, GSA Federal Technology, Herbalife International, MacDonald Corporation, MFXchange, Montgomery Chamber, Prudential Financial, Sate of Maryland, World Bank, and The Hawthorne Press Inc. Nine generic issues generated in the first iteration are described in Table 1 on the previous page.

These nine issues have been summarized in Table 2.

In the second iteration, each research participant was asked to rank order the above nine issues in order of importance to them for present and the near future. Based on mean rank received by each issue from the research participants, rank ordered issues are depicted in Table 3.

Rank One - Evaluating Cost Effectiveness of outsourcing onshore and offshore

Cost savings and labor arbitrage opportunity are largely driven by country decision rather than vendor decision (Vashishtha & Vashishtha, 2005; Palvia S., 2004). For a US based outsourcing organization (outsourcer), the cost savings due to wages can be as high as 70% when outsourced to India/China or as high as 40% when outsourced to Ireland/Canada. However, other costs pertaining to setup, physical infrastructure differences, travel, extra training to help in communication due to language and culture differences, must be factored in. Carmel and Tija (2005) also talk about costs related to technology transfer, overhead, governance, and risk mitigation. Robinson and Kalakota (2005) estimate these additional offshoring costs to be about 40% for India/China thus bringing the net cost advantage to only 30%. Sometimes outsourcing within the country may be better, considering all tangible and intangible costs of offshoring. Vashishtha and Vashishtha (2005) recommend looking at the Total Cost of Outsourcing rather than the savings due to wage differences. Outsourcing per se is meant to provide cost advantage as well as improvement in quality and value of the services. In case of on-shoring, the cost basis of internal and external operations is similar; so any cost advantage is only due to leveraging infrastructure and other fixed costs across multiple clients. However, in both on-shoring and off-shoring, a client organization can avail of the improvement in quality and value from a vendor who utilizes best practices and state of the art technology in the particular business activity.

Rank Two - Managing Changes in Client and Vendor Organizations due to Outsourcing

Vashishta and Vashishtha (2005) devote an entire chapter to this topic under the name of The Offshore Program Management Office (PMO). Offshore PMO's functions are further described in detail under the categories of Contract Management, Financial Management, Performance Management, Relationship Management, and Resource Management. Offshoring of non-core activities to another company in another country is fraught with risks and is bound to meet with resistance from employees and managers in both client and vendor organizations. To address such resistance, according to Carmel and Tija (2005), Change Management includes implementing measures and reward systems to motivate offshoring, creating new organizational structures to support change, educating employees and selling offshoring concept internally, funding demonstration projects, and implementing least disruptive human resource policies. Besides top management support, an offshoring champion may also be needed.

Rank Three - Addressing Myriad Training Issues for Vendors and Clients

For any outsourcing, respective vendor and client organizations have their own structure, history, culture, mission, employee profile etc. When such different organizations have to work with each other on an ongoing basis for a long term, there is a need for training and education on both sides. The requirements for training multiply in the context of offshore outsourcing - since country based differences must also be taken into account to provide relevant education and training to the employees of both organizations. These difference include differences of time zones, climate, language, political philosophy, legal and regulatory regime, culture, history, systems of measurement (e.g., MKS versus FPS). Knowledge transfer is at the root of training needs for the people in two organizations that are in an outsourcing relationship. According to Carmel and Tjia (2005), the four types of knowledge that needs to be transferred (in order of increasing difficulty of training) are: skills such as programming language; process such as harmonizing methodologies between onshore and offshore sites (for examples those pertaining to differences in CMM levels); domain such as business, scientific, algorithmic and artistic; and work/domain norms such as organizational and national culture.

Rank Four - Addressing Security Threat and Intellectual Property Protection Concerns

Data security measures take time to be understood and implemented by offshore locations. Software piracy is a legitimate concern. There are no stringent laws for intellectual property protection. Stipulations should be clearly laid out in terms of client organization's classification of the sensitiveness of various information and expected level of protection by the vendor organization. All the data that is exchanged between the client and vendor should be encrypted and relayed through a secure VPNconnection. Executives attempt to weigh cost savings against risks - "We are debating if the offshore cost savings are worth the intellectual property security risks." (Tedesco, 2004). When software and materials are written in the vendor country and then used in other countries, the laws of several countries may apply. According to Carmel and Tjia (2005), "they are like a patchwork quit, with holes." World Trade Organization - Trade Related Intellectual Property Rights (WTO-TRIPs) establish minimum standards for IP protection for the member states. Most businesses rely on the provisions of applicable international treaties and contracts to protect intellectual property.

Rank Five: Managing Across Geographical Distances, Time Zones, Cultural Differences, and Language Differences

Carmel and Tjia (2005) cover two chapters on these issues titled Overcoming Distance and Time; and Dealing with Cross-Cultural Issues. To manage distance barriers, they talk about the five centrifugal forces that make distributed software work difficult: cohesion barriers, control breakdown, coordination breakdown, communication breakdown, and culture clash. To overcome these problems, they articulate eight practical principles based on the dictum: Formalize much of what is often informal and put more effort into creating informalisms. To manage time differences due to differences in time zones, starting and ending times at work, religious and national holidays, weekends, lunch and other break hours, Carmel and Tjia (2005) describe several asynchronous, synchronous, and awareness tactics. They also recommend the use of appropriate collaborative technologies for managing distance and time differences.

In terms of managing cultural and language differences, Carmel and Tjia (2005) go in detail to articulate the differences and then the strategies to deal with these differences. They summarize nine orientations according to (formulated by Hofstede, Hall and other social scientists): power, relationship, uncertainty, future, time, communication, destiny, universalist, and information processing. They also cite several examples of failure in cross-cultureal communication and in language. Finally, they suggest several steps to improve cross-cultural communication. Vashishtha and VAshishtha (2005) suggest additional investment in employee training including immersion in poular culture (TV shows, movies, sports etc.) to help in bridging the cultural gap.

Rank Six: Managing Failure of Outsourcing

In case of failure of an outsourcing relationship, it is best to spell out in the original Service Level Agreement (SLA) mutually agreed steps to disengage from the relationship in a smooth manner. This is very much akin to spouses in a marriage relationship signing a pre-nuptial agreement. What are the options for the client in case of a failure? The options are find another vendor, or smoothly shift to the backup vendor. Another approach can be to have a portfolio of outsourcing vendors, so that in case of failure with one vendor, other vendors can take up the additional work at least on a temporary basis.